According to the 2005 World Bank report on Brazilian accounting and auditing practices, the gap between national auditing requirements and International Standards on Auditing (ISAs) issued by the International Auditing and Assurance Standards Board is "nominal." However, differences do exist and the World Bank, therefore, recommended fully adopting ISAs for application for all public interest entities (PIEs), which include listed companies, banks, insurance companies, pension funds, and large non-listed companies. In March 2006, the Central Bank of Brazil (BCB) issued Communication No. 14259 announcing its intent to develop procedures for the convergence with ISAs. Per this Communication, by 2010 auditors of Brazilian financial institutions will be required to apply ISAs for conducting the audits. The World Bank report notes that significant changes to auditing requirements are to be introduced by the enactment of the Law No. 11638, including the extension of the requirement to use ISAs in audits of all PIEs. The law became effective on January 1, 2008. However, there is insufficient information publicly available on exactly how the new law changed Brazil's compliance with ISAs. Another recommendation of the World Bank was to establish an oversight body to ensure that licensed auditors meet professional standards in discharging their duties and an overall strengthening of enforcement practices of various regulators.

General Overview

In 2005, the World Bank conducted a review of accounting and auditing practices in Brazil in order to evaluate the weaknesses and strengths of the domestic accounting and auditing requirements. National practices were compared with the International Financial Reporting Standards (IFRSs) and International Standards on Auditing (ISAs). It was observed that "generally accepted auditing standards (GAAS) in Brazil are well developed and are broadly similar to ISA" (p. 31). However, the report notes that some differences exist and the World Bank, therefore, recommended to fully adopt ISAs. More specifically, it recommended that all public interest entities (PIEs) which, as defined by the World Bank, include listed companies, banks, insurance companies, pension funds and large non-listed companies must be subject to a statutory audit. The World Bank report points out that "a draft law to modernize the financial reporting environment in Brazil has been under discussion by the Brazilian Congress since 2000" (p. 11) which is expected to extend the audit requirement to all PIEs. After seven years of review and discussion the draft bill was approved in December 2007 and passed into Law No. 11.638 (effective January 1, 2008). The new law modifies the Corporate Law No. 6.404 of 1976; however, there is no further information on exactly how it addresses Brazilian compliance with ISAs.

According to the World Bank description of the legal and regulatory framework governing auditing practices in Brazil, the Corporate Law prescribes the auditing requirements for non-financial corporations. The Law governs listed and non-listed corporations and under the law only listed entities are subject to a mandatory audit to be performed by an auditor registered with the Securities and Exchange Commission (CVM). Empowered by the Securities and Exchange Law No. 6.385 of 1976 the CVM is responsible for the monitoring and enforcement of financial reporting and auditing requirements for listed companies. The CVM is also empowered to inspect independent auditors of listed entities and can impose sanctions in case of non-compliance. To further tighten the enforcement process, the CVM requires restatement of financial statements in case of any departure from accounting standards in the auditor's report. However, the World Bank points out that the CVM needs to further strengthen its enforcement capacity.

Non-listed corporations and limited liability companies (LLC) (the latter are governed by the Civil Code) are not subject to the statutory audit requirement. The World Bank assessment points out that the absence of the audit requirement in the case of non-listed companies and LLCs which form a significant portion of the domestic corporate sector including a number of large enterprises may lead to lack of confidence in the accuracy of financial statements prepared by such entities. As explained in the report, as proposed by the Draft Law, "all companies or groups of companies, regardless of legal structure (including S/As and limitadas), considered to be economically significant, i.e., with total revenues in excess of BRL 300 million (equivalent to US$126 million) and total assets higher than BRL 240 million (equivalent to US$100 million), would be required to publish audited annual financial statements" (p. 12) and be subject to supervision by the CVM. With the enactment of Law 11.638, a 2008 KPMG report notes that large-sized closely held and limited liability companies are subject to an independent audit requirement.

Financial institutions and investment funds are regulated by the Central Bank of Brazil (BCB) and the CVM and are subject to the audit requirement by an auditor registered with the BCB and CVM respectively. The KPMG report further explains that "financial institutions are required to publish audited annual financial statements within 90 days of end-December, and audited half-year financial statements within 60 days of end-June in a large circulation newspaper" (p. 8). In March 2006, the BCB issued Communication No. 14.259 announcing its intention to develop procedures for the convergence with ISAs. Per this Communication, Brazilian financial institutions will be required the application of ISAs for auditing financial statements by 2010. As explained in the World Bank report, "auditing will be required to adhere to international standards established by the International Federation of Accountants (IFAC)" (p. 43). As for insurance companies, these are regulated by the Superintendency of Private Insurance (SUSEP) and are also required to be audited by an auditor registered with the CVM. The SUSEP has two departments for monitoring compliance with accounting, reporting and auditing requirements and can issue fines for non-compliance with the required standards and rules. The report also notes that the CVM, BCB and SUSEP have stringent requirements for auditor independence.

With regard to educational qualifications, the World Bank notes that although progress has been made in improving education related to accounting and auditing, it does not meet the IFAC standards. The report also notes that a number of Brazilian universities offer accounting and auditing courses but the quality of such programs is not very consistent. However, in 2000, Brazil introduced a requirement for a professional examination for all accountants and accounting technicians which is in line with the IFAC requirements for practicing accountants. Furthermore, the CVM, BCB and the SUSEP mandated a professional qualification exam in order to become a licensed external auditor bringing about further improvements in the development of the profession. The Federal Accounting Council (CFC) in collaboration with the Institute of Independent Auditors of Brazil (IBRACON) also issues guidelines on continuing education for auditors registered with the CVM and the BCB. In addition, the World Bank commended Brazil and noted that "in 2001, CFC put in place a system of quality review of the audit practices, the first of its kind in Latin America" (p. 23).

Auditing standards are set by the CFC which is legally empowered as the oversight body for the profession and the IBRACON, a not-for-profit organization primarily involved in accounting and auditing standard-setting, research and the advancement of the audit profession. While the CFC has the legal mandate for setting auditing standards, the IBRACON has its own set of standards and works in close collaboration with the CFC in developing draft audit standards. Also, the various regulatory agencies are involved in the standard-setting process, however, they do not issue their own standards. With regard to the code of ethics, the World Bank assessment points out that "the CFC's Code of Professional Ethics for Accountants is far less developed and comprehensive than IFAC's" (p. 15). The World Bank, therefore, recommended adopting the professional code of ethics issued by the IFAC. The IBRACON and the CFC are listed as members on the IFAC website.

The Principles

ISA 200 Objective and General Principles Governing an Audit of Financial Statements (effective 2006)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

ISA 210 Terms of Audit Engagements (effective 2006)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

ISA 220R Quality Control for Audits of Historical Financial Information (effective 2005)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

ISA 230R Documentation (effective 2006)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

ISA 240 The Auditor’s Responsibility to Consider Fraud in an Audit of Financial Statements (effective 2004)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

ISA 250 Consideration of Laws and Regulations in an Audit of Financial Statements (effective 2004)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

ISA 260 Communications of Audit Matters With Those Charged With Governance (effective 2004)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

ISA 300 Planning an Audit of Financial Statements (effective 2004)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

ISA 315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (effective 2004)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

ISA 320 Audit Materiality (effective 2004)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

ISA 330 The Auditor’s Procedures in Response to Assessed Risks (effective 2006)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

ISA 402 Audit Considerations Relating to Entities Using Service Organizations (effective 2004)

NC

According to the World Bank assessment, unlike ISA 402, Brazilian GAAS does not address "circumstances when the company outsources its bookkeeping" (p. 31).

ISA 500 Audit Evidence (effective 2004)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

ISA 501 Audit Evidence - Additional Considerations for Specific Items (effective 2004)

NC

According to the World Bank assessment, unlike ISA 501, there is no specific requirement on auditing segment information under Brazilian GAAS.

ISA 505 External Confirmations (effective 2004)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

ISA 510 Initial Engagements — Opening Balances (effective 2004)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

ISA 520 Analytical Procedures (effective 2004)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

ISA 530 Audit Sampling and Other Selective Testing Procedures (effective 2004)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

ISA 540 Audit of Accounting Estimates (effective 2004)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

ISA 545 Auditing Fair Value Measurements and Disclosures (effective 2004)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

ISA 550 Related Parties (effective 2004)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

ISA 560 Subsequent Events (effective 2006)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

ISA 570 Going Concern (effective 2004)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

ISA 580 Management Representations (effective 2004)

NC

According to the World Bank report, Brazilian GAAS differs from ISA 580 on "the adequacy of internal controls aimed at preventing fraud" (p. 31).

ISA 600 Using the Work of Another Auditor (effective)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

ISA 610 Considering the Work of Internal Auditing (effective 2004)

II

There is no publicly available information as to Brazil's compliance with this principle.

ISA 620 Using the Work of an Expert (effective 2005)

NC

According to the World Bank report, unlike ISA 620, "the equivalent Brazilian standard does not require the auditor to assess the reliability of the expert's work" (p. 31).

ISA 700 The Auditor’s Report on Financial Statements (effective 2006)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

ISA 701 Modifications to the Independent Auditor's Report (effective 2006)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

ISA 710 Comparatives (effective 2004)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

ISA 720 Other Information in Documents Containing Audited Financial Statements (effective 2004)

NC

According to the World Bank report, ISA 720 is dealt with in a CVM Guidance applicable only to listed entities.

ISA 800 The Auditor’s Report on Special Purpose Audit Engagements (effective 2006)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.